Do you know the difference between a 401(K) and a Traditional IRA? Do you even know what an SEP IRA is, or if you need to know? Take a look at the terms below to get a better understanding of how to save and invest for your retirement.
1. 401(K): A plan in which you contribute a percentage of your salary (up to $15,500 in 2007) on a pretax basis, which can help reduce your taxable income. (The downside: It will be taxed when you dig into it in retirement.) Employers may choose to match your contributions.
2. 403(B): The 403(b) is a kissing cousin to the 401(k), but is offered at public schools and tax-exempt organizations like libraries, hospitals, and churches. Employees with a joint income of more than $220,000 in 2007 are not eligible.
3. Traditional IRA: An account in which you can contribute up to $34,000 in 2007 alone. There’s no income limit, and contributions are tax-deductible if your joint income is under $83,000 and you don’t contribute to a 401(k). You will, however, pay the tax man once you start milking it during your senior years.
4. Roth IRA: You can contribute $4,000 just like a traditional IRA, but that’s with after-tax dollars; it’s not deductible, and only joint filers with an income under $156,000 qualify. The upside: Wait until you’re 59 1/2 to withdraw, and you won’t pay taxes at all.
5. Roth 401(K): Available at a growing number of companies, a Roth 401(k) is similar to a traditional 401(k) but is funded with after-tax dollars- and the money isn’t taxed when you take it out. You can contribute up to $15,000 in 2007.
6. Spousal IRA: If you’re married and not working or staying home to raise the kids, you can still amass a nest egg by using your mate’s income to fund a spousal IRA. (The max contribution is $4,000 in 2007- it can either be a traditional or Roth depending on your income.)
7. SEP IRA: If you’re self-employed (e.g. part-time consulting), consider opening a SEP IRA, where you can stock away much more than with a traditional or Roth IRA (25% of your adjusted gross income up to $45,000 in 2007).
This was taken from an article in the Summer 2007 edition of The Knot’s magazine, The Nest.
